Report on the paper



Michael Dean



The author argues that political constraints necessitate a gradual approach to restructuring and that gradualism has implications for speed and sequencing privatization. In opposing speedy reforms or "big bang" theories, he states that although such schemes are widely publicized, they are often difficult to implement. In Poland for example the scheme has been blocked politically for more than three years. The reason being that the present ruling party lacks credibility with respect to commitment to privatization. In the presence of political constraints, a policy of fast and non-differentiated privatization carries the danger of partial renationalisations and general delays in restructuring. Raising capital is the real problem in the transition economies for privatized firms as well as intermediaries such as mutual funds and banks. This is the case under giveaway policies where firms can not find a substantial investor first when privatization takes place. The government then has to intervene by subsidizing a large number of firms; in essence partial renationalisastion, in order to prevent high levels of liquidation. 

Under gradual restructuring the policy will work in three ways. Firstly, there will be a screening process to separate the good firms from the bad ones; secondly, an emergence of a sound financial system and thirdly, a credible policy of gradual restructuring and hardening of budget constraints in the state sector. With gradual privatization, only those firms get privatized that find a private acquirer who takes the responsibility of financing future outlays of the firm. Firms will then be in two categories: private firms and S.O.E's. Once firms are privatized, the government will not intervene in any way. S.O.E.'s will still be directly financed through the budget and will not have access to private investment channels. Once the good firms are privatized, the government can concentrate its monitoring activities on the bad firms and reinforce control over them.

From this standpoint, finance for good and bad firms will remain separate. Good firms will become independent through privatization and face hard budget constraints, while bad firms would operate under more stringent government controls. If all firms are financed through the banking system, bad firms are likely to spoil the financial system.


I disagree with Roland's point of view, even though his argument seems theoretically sound. Roland proposes that because of political constraints involved with speedy reform measures, policies are often not implemented. Industries are often said to collapse because of bureaucratic bungling. He states that the government should select certain industries for privatization and develop a scheme for this eventual purpose.

My main points of opposition are:

While politicians are deciding which industries should be privatized first, many inefficient and outdated concerns will still be operating. This means that the state will have to finance these concerns to keep them afloat. Immediately the real incentive for restructuring within these concerns is removed and they can continue operating as usual.

East European countries are competing vehemently to make their products more competitive within the western arena. To do this, many companies need hard currency from foreign investors in order to restructure their firms. Those countries which offer the most expedient and profitable portfolios will certainly get the lion's share of investors.

Internal bickering will ensue as politicians decide which companies should be privatized. Many industries are large entities stemming from the communist era and which employ many people. Privatization of these firms will mean the loss of many jobs, which immediately makes the regional politician very unpopular. Political unity, I think is the key if any reform plan is going to be introduced successfully. The more the politicians intervene with the privatization of industries and firms, the more problems seem to evolve.


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